Interest Rates and Credit Scores

How are interest rates and credit scores related?

There is a strong correlation between interest rates and credit scores. The credit score is a numerical measure of the person’s ability to borrow, which considers their past and present financial behaviour (Interest Rates | by Wall Street Survivor, n.d.). Lenders use this credit score to evaluate the risk of granting an individual money. The interest rate is directly affected by the credit score of a borrower. In most cases, a good credit score will give access to interest rates that are reduced in price, and bad scores could mean higher than normal interest rates (Interest Rates | by Wall Street Survivor, n.d.). This relationship presupposes that people with good credit histories are at a reduced risk for the lenders. Hence, they get more favourable interest rates.

What are three things you can do to influence a credit score?

It is crucial to have a good credit score for financial stability, and accordingly, influencing positively the latter impacts it involves planned actions. Secondly, it is important to make timely payments on bills of credit card loans and other financial obligations (Lone & Bhat, 2022). One’s credit score is significantly influenced by payment histories, where paying on time portrays good character about being a credit-worthy person. On the contrary, a negative impact of late payments may include a lower credit score.

Second, credit card balances have an important role. The credit utilization of current balances against credits also affects the score. It is, therefore, always recommended to keep balances low relative to credit limits and maintain a maximum utilization rate of 30% (Lone & Bhat, 2022). This not only showcases sound credit management but also boosts a better credit score.

Finally, periodic reviewing and adjustment of credit reports is a necessary routine. Seeking and reviewing credit reports enables people to detect mistakes, differences or frauds. Prompt reporting of any errors to credit bureaus ensures that the current information fits in one’s financial past. An up-to-date credit report is essential to prevent reductions in the score and, thus, an important element of responsible financial behaviour.

Interest rates can cost you money. Provide an example. Interest rates can also make you money. Provide an example.

In dealing with financial matters, the correlation between interest rates and how they affect personal spending can be illustrated by using borrowing as well as investing cases. Look at a case of a personal loan where the individual takes $10,000 with 10% interest payable after three years. In total, $13,300 would be repaid by including the interest of $ 3,95 thousand that will have accumulated during a loan term. In such a situation, the interest rate serves as additional costs that increase the amount of money repaid beyond what was borrowed initially (Lone & Bhat, 2022). This illustration serves as a reminder of how high lending interest rates result in rising investment expenditure, which makes borrowed money less affordable.

On the other hand, if we consider an investment situation, imagine that you deposit $1000 into a savings account, whereby it gets compounded at 5% per annum. In a year, the account would add $50 interest, effectively netting an investor with that amount as profit. In this case, the interest rate serves as a tool for creating additional returns on top of the first investment (Lone & Bhat, 2022). This illustrates that interest rates can be viewed as either a cost, such as in borrowing, or they may lead to profit when investing. This is critical for people who find themselves negotiating the treacherous terrain of financial decisions and striving towards better benefits.

Finally, it is important to understand the correlation between credit scores and interest rates when handling finances. A high credit score can translate to lower interest rates, which means that you save a lot over the life of loans, as shown in the car loan scenario. Moreover, your credit behaviour should be actively managed with timely payments and responsible use of available credits on an ongoing basis to positively influence the score.

References

Interest Rates | by Wall Street Survivor. (n.d.). Www.youtube.com. https://www.youtube.com/watch?v=GHHesANT6OM

Lone, U. M., & Bhat, S. A. (2022). Impact of financial literacy on financial well-being: a mediational role of financial self-efficacy. Journal of Financial Services Marketing. https://doi.org/10.1057/s41264-022-00183-8